It has been a neck to neck battle since 2014 when Amazon announced $ 2 billion investment, Flipkart announced a $1 billion investment and Snapdeal was valued at $1,000,000,000 followed by funding from Softbank with investments worth $627 million in fresh capital. After pumping more than $9 billion into Indian startups since the beginning of 2014, investors started pulling back late last year. This year, the Unicorn cab aggregator Ola shut down its food and grocery delivery businesses Ola Cafe and Ola Store.

It is the dampening of the valuation game that has recently led the CEO’s of Flipkart and Snapdeal switch to aiming at satisfying and retaining customers rather than talking up their sales numbers.

So, there is a shift from the earlier measure, i.e. Gross Mercantile Value (GMV) which would evaluate a company based merely on its gross sales values to Net Promoter Score (NPS) that weighs customer loyalty and satisfaction as the primary basis for a firm’s valuation in the market. Competition decides survival of the fittest or the exit of the businesses that cannot sustain competition. To stay ahead of competition, managers require a constant review of business strategies, but which are not short term.

Techies thrive on solving problems of millions of potential users by setting outrageous goals, however the steps to get there are seldom laid out clearly. Chances are, they can’t seem to fathom the incisive questions to ask that would spot where a plan can go wrong.

The world of entrepreneurs and lawyers are not too far apart, considering how lawyers have to think of risk mitigating solutions for their clients’ businesses. As a lawyer, I act as a problem finder first, to be able to identify potential risks in a client’s business proposition and operations.

¹ Specialist in Competition & Regulatory Law Practices. Anupam Sanghi, the Managing Partner of Anupam sanghi and Associates has been representing the Competition Commission of India. She is also supporting Law Firms who need competition analysis for Opinions and Litigation. Recently, the Competition Commission of India appointed her on its first formal panel of legal advisors.

As a regulatory policy advisor, my job is to dive deep into understanding the regulatory grey areas and to analyze competition concerns – see how markets work and how it may affect my client’s business model. Occasionally, I have to think of new business ideas to differentiate the client’s business model, to protect their brand in a competitive marketplace.

Some of the Indian antitrust cases against online market players like Flipkart / Snapdeal and Ola / Uber provide two lessons for scaling technology companies –

First, when disruptors enter the market and gain scale, incumbents would fight back and collude to find ways to prevent competition. The classic examples from other jurisdictions are the Apple’s ebook’s case² & Google’s AsWords case³.

Second, the decisions of the competition regulator ( CCI ) shows how easy it is to confuse the notions of ‘protecting competitors’ with those of ‘protecting competition’ and how important market definition is to determine market power.

On the disruptive entry of Flipkart & other e-tailers, ostensibly called marketplaces, the brick and mortar businesses were threatened with their pricing strategies. In 2014, the Confederation of All India Traders (CAIT) informed the Competition Commission of India (CCI) about traditional shops being driven out of the market due to deep discounts being offered by Flipkart and such online portals.

The CCI closed the case allowing the e-commerce companies to continue with their pricing. However, without a ‘relevant market’ analysis for defining the market, the CCI inconclusively stated, “irrespective of whether we consider e-portal market as a separate relevant product market or as a sub-segment of the market for distribution, none of the Online Portals seems to be individually dominant.”⁴

In contradistinction to this view, in the case of Fast Track Vs. Ola⁵, the CCI narrowly defined the market as ‘ radio taxi services’ not including traditional taxi services and held that OLA was

predatory pricing and directed DG to investigate in Apr 2015. ( However, later closed the case in Feb 2016 with a contradictory view of its earlier order )

Earlier, the CCI had stated in the SanDisk’s case⁶ that online and brick and mortar are separate channels of the same relevant market, even though it noted that both offline and online markets differ in terms of discounts and shopping experience and buyers weigh the options available in both markets and decide accordingly.

Apparently, there seems to be no basis for treating online markets like Flipkart & OLA differently since they are all disruptive technology solutions. Their business model makes E- commerce a separate market with cost benefits & efficiency. More importantly, without any competition analysis on how the market is affected adversely, they cannot be assumed to be ‘predatory’ based on allegations of foreign funding.

CCI’s decision leaves some pertinent issues open, especially on economic considerations, to analyze the market impact on online vs. offline business. CCI’s decisions in the e-commerce sector does not give clarity on how it will assess market power of such technology based business models.

Thus, without application of competition rules as practiced globally, the effect of CCI’s decision is not clear – abstaining from interfering may allow the market competition to evolve or entertaining a competitor’s information may benefit an inefficient competitor.

The incumbents continued to battle and the Retailers Associations & AIFMRA filed a writ petition in Delhi High Court alleging violation of FDI policy norms by the e-commerce portals. ⁷ Uber files suit for injunction against OLA in Delhi High Court as competition between OLA & Uber intensifies.⁸

 

What causes regulatory risks?

• The current approach of policy makers is to improvise and learn with time and that leads to knee jerk reactions.
• The scope of E-commerce is loosely Hence –
• Taxies, brick and mortar shops threatened;
• The policy discriminates among various stakeholders: B2B versus B2C; traders versus manufacturers;
• Start Ups and e-commerce companies combat unpredictable litigation & legal challenges thereby making investments risky.
• Multiple regulators have contradictory
• The CCI can alter its view as it is not given a reasoned ‘relevant market’
• Companies should not see immediate benefits – if they are not affected right now, as flawed / scanty policies or decisions tend to hit unnoticed and it has happened for

While these “e-commerce businesses” confront a variety of the same legal issues faced by traditional brick-and-mortar companies, they resist regulations. However, they need to manage their challenges with awareness of the regulatory implications. The range of legal issues to consider and manage continues to grow, and ignoring this reality could lead to financial liability, regulatory penalties or unauthorized exploitation of a company’s intellectual property.

 

Tension between regulation & competition created due to disruptive entry

A complex question is, for instance, whether online market players should be subject to the same regulatory regime or to separate regimes adapted to their characteristics. Another question is how can they co-exist with the traditional market so that competition is not adversely affected.

Since the services proposed by online and traditional businesses are currently so far apart, it may be difficult to find a regulatory regime suiting them both.

The commercial triumph of online markets, however, is only a matter of time because of its inherent efficiencies. It seems the investors are funding these ventures on this basis.

 

Conclusion

As our economy evolves, so must our application of the competition laws to be able to ‘catch up’ with the market. A highly competitive environment would thrive on inclusive growth. It is a key for innovation and technological change, and this environment is what pushes companies to constantly innovate. It is true that Competition laws were always applied to new businesses replacing old, however, today they are applied to a new platform as we move from ‘brick’ to the ‘cloud’.

These e-commerce companies have two options. First option is to face many years of litigation & regulatory risks, till they are able to operate legally. The second, preferable, option is to be aware of the regulatory risks so as to avoid pitfalls of adverse directions that could affect their brand value.

It is often seen that innovative business / regulatory strategy is the key to creating and sustaining valuable business models. For instance,

• Business strategy – to be future ready – In a market of volatile competition in terms of prices and innovative solutions, how can you be ahead of competitors?. What is critical to dominating e-commerce in India, while the Policy allows 100% FDI only if you follow the marketplace model? What decides winners: discounts, better technology / business solution, valuation, countering competitor’s actions or regulator’s intervention that can erode brand value?
• Regulatory strategy – for a sustainable policy environment. It is not possible to be a sustainable business in an unsustainable All business models rely on particular

external conditions, most importantly on a country’s economic policy and regulatory framework. Can your regulators & competitors let your business grow without legal compliance with existing statues? So, have you adapted to legislations?

Most emerging sectors and startup businesses tend to focus only on their valuations and neglect all other factors. As seen in emerging sectors, often there are legislative gaps in newly liberalized policies, an inadequate regulatory framework adding to the grey areas and the government / regulator’s huge discretion which can toss such valuations out of the window.

The environment today, calls for sustainable plans that foresee market changes in the future and can work with minimal regulatory risks.

² United States of America v. Apple Inc., et al., 12 Civ. 2862 (DLC).

³ The Authors’ Guild, Inc. v. Google Inc., 05 Civ. 8136 (DC) (S.D.N.Y. Nov. 14, 2013).

⁴ Mr. Mohit Manglani vs. M/s Flipkart India Private Limited & Ors, Case No. 80 of 2014, para 18.

⁵Fast Track vs. Ola, Case No. 06 of 2015, para 12.

⁶ Ashish Ahuja vs. SanDisk Corporation., Case No. 17 of 2014, para 16.

⁷ All India Footwear Manufacturers & Retailers Association & Ors. Vs Union of India & Ors., WP (C) 7479/2015 & CM No.13823/2015.

⁸ Uber India Technology Private … vs Government of Nct of Delhi & Anr on 8 July, 2015, W.P. (C) 6004/2015.